If you sell on Etsy, Shopify, Amazon, eBay, or your own online store, the IRS treats you as a self-employed business owner the moment you’re selling with the intent to make a profit. That means Schedule C, self-employment tax on your net profit, and — the good part — a long list of deductible expenses that lower what you owe.
You’re a Business, Not a Hobby
The IRS distinguishes between a hobby and a business based on factors like whether you keep good records, work to improve profitability, and depend on the income. Hobby sales can’t deduct expenses beyond the cost of goods sold, so establishing your shop as a genuine business matters for tax purposes.
Cost of Goods Sold
Materials, wholesale inventory, packaging, and any component that goes directly into the products you sell are deductible as cost of goods sold, reducing your gross revenue before other expenses are even considered.
Platform and Payment Processing Fees
Etsy listing fees, transaction fees, Shopify subscription costs, and payment processor fees from PayPal, Stripe, or Square are all fully deductible business expenses.
Shipping and Packaging Supplies
Postage, shipping labels, boxes, bubble wrap, tape, and branded packaging materials are deductible, along with any shipping software subscription you use to print labels or track orders.
Home Office Deduction
If you have a dedicated space in your home used regularly and exclusively for running your shop — packing orders, managing inventory, photographing products — you can deduct a portion of your rent or mortgage interest, utilities, and insurance using the simplified or actual method.
Photography and Marketing
Camera equipment, props, editing software, and paid advertising on Etsy, Instagram, or Google are deductible marketing and business expenses.
Software and Subscriptions
Accounting software, inventory management tools, design software like Canva or Adobe, and email marketing platforms all count as deductible business tools.
Craft Fairs and Trade Shows
Booth fees, travel to and from events, and mileage driven to sell at markets or trade shows are deductible, along with the cost of tables, displays, and signage you use only for selling.
Business Insurance and Licenses
General liability insurance, business license fees, and any state or local seller’s permit costs are deductible.
What You Can’t Deduct
Personal use of materials you also sell, inventory you give away as personal gifts, and the value of your own labor are not deductible — only your actual out-of-pocket costs count.
Separating Your Shop Income From Personal Spending
Beyond tracking cost of goods and fees, many sellers find it easier to manage cash flow by routing Etsy or marketplace payouts into a dedicated account rather than a personal one. Some sellers use a fee-free banking app like Chime for this, since it can make direct deposits available early and has no monthly maintenance fees. (Referral link — I may receive a reward if you open an account.)
Frequently Asked Questions
Do I need an LLC to claim these deductions? No — sole proprietors selling under their own name can claim all of these deductions on Schedule C without forming a business entity.
What if I sell on multiple platforms? Combine income and expenses from every platform onto one Schedule C, since you’re running a single selling business regardless of how many marketplaces you use.
How do I handle inventory I haven’t sold yet? Unsold inventory generally isn’t deducted until the year it sells, so track your cost of goods sold based on what actually moved during the tax year.
A tax professional can help you sort out inventory accounting methods and confirm whether your home office space qualifies, since these two areas trip up online sellers most often.